Inventory Fraud Increases in Silver Market

Aug. 9.10 | About: iShares Silver (SLV)

When I first began examining supply/demand data on the silver market several years ago, I was somewhat hesitant to form conclusions, as silver (and gold) have traits which are very different than ordinary commodities – which affects supply/demand analysis. The second factor which made such analysis more difficult was that supply and demand are reported much differently than for ordinary commodities.

Generally, the supply/demand equation for a commodity is very simple: “supply” is the total amount produced, while “demand” represents consumption. When supply exceeds demand, the remainder is added to inventories, while when demand exceeds supply, the deficit must be taken from inventories.

Reporting of supply and demand for the silver market is totally different. While I originally deferred to such reporting as reflecting the different nature of the silver market, it has now become obvious that the convoluted manner in which supply and demand is reported is simply another deliberate attempt at deceit in this market. In fact, when we look at the numbers closely we see a clumsy sham which should not be able to fool a reasonably perceptive 12-year-old.

Regular readers are already familiar with one facet of this fraud, since I have mentioned it frequently in previous commentaries. All of the “silver” (supposedly) held by bullion-ETFs has been added to silver inventories – the major ruse used to hide the fact that silver inventories are over 90% lower than they were 20 years ago. Since I still get questions and remarks from readers who express doubt about my characterization of this as “fraud”, let me explain this scenario slightly differently.

Let me begin with a definition. An “inventory” is the quantity of a particular good which is warehoused and ready to be sold. When an investor decides to purchase an ounce of silver, obviously that ounce is then subtracted from inventories. It should not make any difference how or where that ounce of silver is purchased. However, suppose our hypothetical silver investor has not read my commentaries – and thus does not know that SLV (the largest, so-called silver bullion-ETF) is nothing but a massive JP Morgan sham.

Instead of buying the ounce of silver directly, our foolish investor chooses to purchase a unit of SLV. Essentially, he is designating SLV as his “agent” to buy and store the bullion on his behalf. So, SLV buys the ounce of silver, and it is then subtracted from inventories (like any other purchase). However, immediately after purchase, SLV takes the investor's ounce of silver and dumps it back into the silver inventory – where anyone else in the world can buy that ounce of silver.

Obviously, SLV has turned this into a sham-transaction. If the investor buys the ounce of silver directly, it is permanently removed from inventories (unless/until that investor chooses to sell it). However, with the SLV shell-game, since every ounce of silver “bought” by SLV is immediately added-back into inventories, what this means is that every unit of SLV could (theoretically) simply be the same ounce of silver purchased and re-purchased hundreds of millions of times by SLV unit-holders.

Of course, on a practical basis this isn't the case. Since many SLV unit-holders hold large numbers of “silver” units, the entire SLV scam could not be conducted with just one ounce of silver. However, it clearly only takes a minute fraction of the total number of units of silver sold in order to operate this scam – much less than 1% of the total size of the fund.

The second aspect of SLV fraud is that the supposed “custodian” of all that SLV silver is JP Morgan. JP Morgan has a massive short position which is never audited that is always almost roughly the same size as the (supposed) holdings of SLV (an amazing coincidence!). Thus, even with the supposed “audits” of SLV, JP Morgan has never shown that is has more than half as much silver as it needs to cover both the short position and the custodian agreement.

Since JP Morgan could suffer potentially infinite losses on that short position (which it has leveraged by somewhere around 100:1), obviously whatever silver JP Morgan holds would be used to cover its own short position, and if there was anything left over, that would go to SLV unit-holders. Clearly, if JP Morgan was only leveraging its silver by 2:1, that alone could mean that SLV is 100% paper. Since we know (from “Loose-Lips” Christian) that these bullion-banks are leveraged by closer to 100:1, the odds of this fund being even partially backed with silver are very slim.

With 2009 supply/demand data for silver finally being released (more than a month later than last year), I can now add that the clumsy sham of SLV is matched by a set of equally dubious numbers which are supposed to represent supply and demand. Recall what I said about supply and demand for a commodity at the beginning of this piece. Production equals “supply”, consumption equals “demand”. Any excess supply is added to inventories, and excess demand is subtracted.

Then there is the silver market. In the fantasy-land of the silver market, we're told that supply equals demand every year. This is obviously not possible with any realistic model of supply and demand, but here is how this sham is constructed. Once (supposed) demand has been calculated, then numbers for mine-supply + government sales + recycled silver are added to this “equation” - with the net balance always being zero.

What we are supposed to believe is that either the miners, the recyclers, or governments are omniscient (or perhaps all three), because one or all of these contributors to supply supplies only enough silver to the market each year (down to the ounce) to precisely offset demand. Call me a “skeptic”, but I doubt that any of these market players is omniscient. Given the time, effort and logistics involved with mining silver or recycling silver, it's impossible for either of those players in the market to instantaneously adjust their output, so that there is never any surplus or deficit in the silver market.

What about government sales, you ask? Clearly, (nearly depleted) government stockpiles can be released into the market very quickly – so this mechanism could ensure that the market remains in balance. Here's where it gets interesting. Government sales have dwindled year-by-year to the point that they now only account for 2% of total supply. Given the tiny contribution to silver supply made by government sales, obviously the quantity is simply too small to make-up for any substantial supply-deficit.

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But wait!

We are also told that in the “magical” world of the silver market, demand never changes. As I reported in a previous commentary, total demand for 2007 equaled total demand for 2008 – right down to the nearest tenth of a ton: identical demand for those two years, despite the collapse of the U.S. economy in 2007, and the sudden, mysterious even greater collapse of the global economy in 2008. We had two of the most-volatile years in economic history, and yet we are supposed to believe that demand for silver remained identical.

Now the numbers for 2009 have been released: the year of the “U.S. economic recovery” and the global economic recovery – and another dramatic reversal in the global economy. And what happened to silver demand? It increased from 888.3 tons to 889.0 tons – a difference of 0.7 tons, which translates into an increase of 0.08%. In the magical world of silver, even the 2% of supply contributed by governments is enough to meet any supply-deficit, because demand (supposedly) never changes.

Because there are large numbers of readers out there who simply refuse to believe in “manipulation” or “conspiracies” or simply lying, I'm sure that there are still some people out there who do believe that in the magical world of silver, demand never changes, and supply always perfectly equals demand. So let's move on.

If supply always precisely equals demand every year, this dictates another conclusion: inventories can never change. Remember how markets operate: if demand exceeds supply, that excess is drawn out of inventories, while if supply exceeds demand the excess is added to inventories. If supply precisely equals demand every year, there can never possibly be any change in inventories.

Now have a look at the chart below. Regular readers are already familiar with how silver inventories made a complete U-turn in 2005, and after plummeting straight down for 15 years, they are now moving nearly straight up – supposedly inventories have nearly quadrupled in that span. Inventories have quadrupled, even though supply equaled demand every year.

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To be more precise, silver inventories supposedly increased by over 30% last year alone, from roughly 600 million ounces to nearly 800 million ounces. Given that supply supposedly precisely equaled demand last year, the obvious question is where did this phantom, 200 million ounces come from?

Part of the answer to that question I have answered previously: through the fraud of adding ETF-units to silver inventories. However, as the graph below shows, during 2009 holdings of the seven largest silver bullion-ETF's increased by roughly 110 million ounces – from 350 million ounces to 460 million. But that still leaves 90 million ounces which are totally unaccounted.

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It wasn't enough for these clumsy fraudsters to merely add the units of ETFs to inventories (despite the fact that this silver is not on the market), they also padded inventories by an additional 90 million ounces – with absolutely no “silver” (not even ETF-paper) to account for it.

For argument's sake, let's ignore one of the lies regarding the silver market: that supply equals demand every year. We know the reason for that lie: to created the illusion that the silver market is “in balance”. So let's just completely throw out demand numbers – since we know it was absolutely impossible for demand to remain unchanged for 2007, 2008, and 2009. Let's only look at supply.

There are three components of supply: mine-production, recycling/scrap, and government sales. Total scrap/recycling is falling every year. Not only is government supply also falling every year, but the numbers are being retroactively revised lower. After 2008, government sales were reported as amounting to 30.9 million ounces. However, by the end of 2009, the amount of government silver sold in 2008 had decreased to 27.6 million ounces. Yet another 3.3 million ounces of “silver” has simply evaporated!

We are told that silver mine-supply is supposedly rising every year (by a meager 25 million ounces in 2009), despite the fact that 2/3 of mine-supply is a “byproduct” of base metals mining, and despite the fact that the Crash of '08 decimated base metals mining around the world. Remarkably, in the magical world of silver, silver-production was supposedly totally unaffected. However, what must be clearly noted is that this (supposed) increase in mine-supply is totally offset (down to the ounce) by the decrease in recycling and government sales – yet another remarkable “coincidence” in the silver market. Thus, it is totally impossible for “increased mine supply” to account for the massive, phantom increases in reported silver inventories.

By the end of 2004, global silver inventories had plunged to their lowest level in many decades (and likely several centuries). We know that we can rely upon the data to that point, since the people manipulating the silver market would not want to overstate the decimation of inventories. It is equally clear that all the supply, demand, and inventory numbers since that date have been heavily contrived, to the point of being completely meaningless. Keep in mind that the two quasi-official private “consultancies” who create these doctored-numbers (GFMS and The CPM Group) are intimate buddies with the bullion-banks, indeed Jeffrey Christian (the head of The CPM Group) is a Goldman Sachs “alumnus”.

While it is always an uncomfortable feeling for an investor to “fly blind” in any particular market, let's review what we can say with certainty. We know that by 2005 silver inventories had been reduced by 90% in just 15 years. We know that since that time the banksters and their allies have been so desperate to hide the truth that they have perpetrated numerous frauds, including totally falsifying supply, demand and inventory data.

What can we deduce from this? Obviously, if silver inventories really were increasing then the banksters would want to make the market as “transparent” as possible – to show people all this new silver. Thus, we know that silver inventories are not increasing. However, if silver inventories were staying flat, or even falling at a more gradual rate, then surely it would not be necessary to falsify all the numbers in this market, and on a huge scale – with hundreds of millions of ounces of “silver” being conjured out of thin-air every year (not much different from how the bankers conjure our “money”)?

Therefore, even the massive fraud being perpetrated in reporting the activities in the silver market should not deter investors from capitalizing on (literally) a once-in-a-lifetime investment opportunity. Think about how close the silver market must be to its inevitable default, if the high-and-mighty bankers (who continually tell us how brilliant they are) are incapable of perpetrating a scam more believable than this incredibly clumsy farce.

The silver you can hold in your hand is real. The shares of silver mining companies are real. The (limited) number of legitimate bullion-ETFs who directly hold their own silver are real. But in the “magical” world of silver, everything else is merely a bankster-illusion.

Disclosure: I hold no position in JP Morgan, Goldman Sachs, or SLV